Free Commentary

Sep 13, 2017

By: Dan Hueber –

After receiving desired news from the USDA yesterday morning, the gleeful bears may have launched into their victory dance just a bit prematurely. After the initial rounds of selling, corn and bean prices bounced very well from the extreme lows and the lowly wheat market actually provided us with a daily outside reversal higher. In fact, with the follow-through strength that we have witnessed this morning, we have December wheat challenging the highest close that we have seen in month. Granted, wheat really saw nothing that was considered overtly bearish in the figures yesterday so probably should not have suffered that initial blow, but as I have commented time and again this year, grain and to a lesser extent soy prices continue to hover around multi-year lows and at ranges that appears to attract value buying, so it was encouraging to see prices snap back as they did yesterday. Of course, as I commented yesterday, we are going to need a stimulus to carry us away from this floor and exactly where that might come from is the great unknown. For the grains at least, I continue to believe that any sustainable advance will need to be led by wheat, and I am cautiously optimistic after witnessing the performance yesterday.

It would appear that China is quite serious about taking care if its corn inventory problem as for the first time ever, the government has published as targeted timeline for increasing the usage and manufacture of ethanol. The stated goal now is to basically double the manufacture of ethanol to 4 MMT by 2020 and there are some in private sector who believe this number could actually push up to the 6 to 8 MMT level. Be that as it may, the official estimates project that by 2020, gasoline demand will reach 150 MMT per year and will under the new guidelines will require 15 MMT of ethanol, potentially using 45 MMT of corn each year. Considering it is estimated that the nation sits on around 200 MMT of corn, it would not take long to eat up those stocks. Let’s keep in mind that not too many years ago, China espoused a disdain for ethanol and once they have accomplished the goal of getting their corn inventory in check, they could very well decide once again it is not in the best long-term interest of their citizens, particularly considering their goal of moving towards electric vehicles. Even if that were the case, the long-term potential for corn consumption in that nation is huge and once they have reentered the import market, it will most likely be in a big way.

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